Bring a Little More Savings to the Table
A diligent review of your lease-related billings just may bring a little more savings to the table. With that in mind, we asked a number of NRTA members to offer their expertise on the topic of applying lease audit and lease administration skills to protect the bottom line. Here is a compendium of their thoughts.
The prudent retail lease auditor/lease administrator can help protect the bottom line of their company. A diligent review of your lease-related billings just may bring a little more savings to the table in this environment. There is a chance that you are being billed for costs that might not necessarily be valid based on the definitions in your lease.
Every lease is different, so you must take the time to understand the specifics of your lease before going down this path. There are four tips that we offer to help the lease auditor catch the “Trickle Down” costs that may creep into your lease billings.
Real Estate Taxes
There are a few things to look for as you begin paying your real estate tax bills for this year.
For those retailers that have stores that sit on their own parcel, you need to keep an eye on the assessment levied against your real estate. You should take an objective look at the assessed value to determine if it is in line with the market value. This obvi- ously needs to be done location by loca- tion. We suggest recruiting the assistance of professionals.Whether it is your tax accounting rm, a tax recovery rm or a law rm that specializes in real estate assessment challenges, you should consider a (cost-free) review of your portfolio.
For every retailer, whether you pay for your own parcel or you pay a pro rata share of the greater tax bill, you should review your lease to understand the de nition of real estate taxes. Some simple questions to ask as you review the lease and the real es- tate tax billing:
•What items outside of taxes on real property are included and are excluded?
•Pay close attention to special assess-
ments on the billing and in your lease.
•Has the assessed value changed and if so, why? What rights do you have as
tenant in appealing the assessment?
•Is the landlord passing through addition- al costs for a review of the assessment,
and if so, are they permitted to do so?
These four questions will allow you to at least capture some of the more common issues found in typical real estate billings.
Insurance Cost Trickle
There are many issues related to insurance that can be addressed in any cost containment discussion. But what can the average lease auditor focus on to get a quick comfort level with an insurance billing?
One way to do this is looking at the rate per square foot in this (past) year’s billing versus the prior billing. If you see a significant increase, start asking questions.
Understand the area that is covered by the landlord’s billing and compare that against the definition of pro rata share of insurance in your lease. Is the landlord under-allocating the cost? In other words, are they including every tenant and/or storeroom (even if vacant) that should be included in the denominator? This is an item that a lease auditor should review for all occupancy billings including real estate taxes, insurance, common area maintenance, utilities and other shared expenses.
If your lease allows, require the landlord to provide proof of payment (to the insurance carrier) and proof of coverage in the form of an insurance certificate.
In requesting an insurance certificate, you will want to ensure that not only was
the landlord covered for the period they billed to you (assuming it is billed in arrears); but you also should ensure that you continue to be covered by requesting a cur- rent insurance certificate. This is especially important for locations where you may have a history of incidents and claims against the landlord (by third parties/customers).
Utilities and Shared Services
Whether included in common area maintenance or billed separately, the lease auditor should pay attention to utility billings and shared services such as refuse removal. In these cases, not only is every lease different, but the tenant mix, services required, and services provided will vary from site to site. The lease auditor may find that the billing methodology is not adequately defined in their lease, if at all. References in the lease may be vague enough to leave it up to interpretation or the center may be so old that the actual design does not match how it is de ned in your lease today.
Look for Consistency
Look for consistency. Not only do you want to see consistency from year to year, but you also want to see consistency in how the landlord is billing every tenant. For example, if you are paying for a shared electric service, you do not want to see other tenants pulled out of the denominator(assuming proration square footage)and billed a fixed fee if there is no valid reason for the landlord to do so.
You also want to look at what is equitable to all of the tenants in the center. Remember- ing that these are shared services, a pro rata share calculation based on square foot- age may not be warranted. For example, a restaurant is likely to use more water than the average retailer. A full service grocery store or supermarket is likely to use more electricity and generate more waste than other retailers. Remember that you are looking for equity in your lease; your deal with the landlord. You do not necessarily care about the deal that the landlord has with the other tenants; you just have to make sure that the landlord is not penalizing you for their deal with the tenants.
Common Area Maintenance / Operating Expenses
That leads us to Common Area Maintenance and Operating Expense (CAM), the “catch all” of the trickle down expenses. The thought process behind what we will lay out here is not based on good or bad practices of landlords. Those are considerations in the review of any CAM billing, but not our focus here today. We are in- stead addressing the potential of incremental costs trickling down to the CAM pool based on the current economic conditions; more specifically, increasing vacancy rates. Developers, landlords and retailers are likely to see trickle down expenses as a result of a series of events that occurred over the past few years. These events could play into artificially high CAM costs in the coming year.
Unusually high growth in foreign markets like Asia had started to push commodity prices upward including oil, steel, lumber and other construction materials. On top of that, some significant natural disasters also played a role in pushing those costs further upward. Those price increases potentially impact CAM costs as contractors and other service providers realized increased costs in raw materials and were eventually forced to push those increases into prices they charge.
A significant increase can be expected in any service that is directly impacted by petroleum. That will certainly play into what your landlord has paid for common services such as parking lot sweeping and cleaning, snow plowing and refuse removal.
Our first recommendation is to understand that it is likely that you will see an increase in CAM costs for this past year. Keeping this in mind as you receive your billings from your landlords, do not let that underlying theme be the reason, either assumed (by you) or given to you (by your landlord) as the only reason for the increase. While it is possible and probable that you will find that to be the case from time to time, there are other trickle down items to look for as you review and audit your CAM billings.
For starters, the lease auditor should review and understand the impacts of tenancy levels on its pro rata share of CAM. Pay close attention to the definition of the denominator in the pro rata share calculation. Is it “leased”, “leasable”, “occupied” or “existing” floor area / building space? These subtle differences can result in significant differences in what you should be paying as your pro rata share. In the event of the “leased” or “occupied” language, it is essential that you ask the landlord to provide support for their denominator. Remember that every square foot counts when you are dealing with these definitions so be sure to understand what is included and what is excluded.
The other area where vacancies may impact CAM costs is in service levels. A parking lot or two may be able to be left alone, or at least have reduced service, when it is time to bring the snow plows out. This of course will vary by center, so it is important to understand the layout of the center including access roads, ring roads and traffic flow and parking fields.
Conversely, if a now vacant tenant had been maintaining its own lot for snow plowing, sweeping and cleaning or lawn maintenance, among other things, you may see an increase in costs incurred by thelandlord. This is where the lease auditor needs to understand the definition of common areas. Again, you are looking for equity in your lease; your deal with the landlord. You do not care about the deal that
the landlord has with the other tenants; youjust have to make sure that the landlord is not penalizing you for their deal with the tenants. This thought should be considered in the event the landlord is required to start maintaining a parcel that was left vacant by a tenant closing down shop.
The true impact of the trickle down expense is not always evident and as easy to
catch as outlined in our previous examples.There are certain trickle down expenses that might only be caught in a detailed review of the CAM billing and its supporting documentation. For those retailers that are entitled to obtain a copy of the detailed support documents from the landlord, we recommend that you make that request. You will want to search for items that appear out of place and costs that would not have been incurred had a space(s) not gone empty during the year. Some things to look for as trickle down:
Utilities– Look for new accounts/accounts that did not exist in the prior year; could be vacant space.
Snow Removal, Lot Sweeping and Cleaning and Lawn Care– Look for increases in service; is the landlord now servicing a parcel that was previously serviced by a tenant that is now gone?
Trash, Refuse and Garbage– Look for large, one-time expenditures that could be related to cleaning out a vacant storeroom. These costs could be pricey for certain types of retailers that require more than nor- mal work to clean up such as grocers (refrigerants) and auto part stores (oil, tires, batteries).
Repairs and Maintenance– A landlord may incur costs to board up a vacant storeroom and/or make repairs to damage caused by a tenant moving out.
Janitorial and Cleaning Costs–The landlord may incur costs to clean a vacant space.
Security Costs–Additional costs may be incurred for security (after hour or additional patrolmen) to cover going out of business sales and/or timing of emptying out a storeroom.
Roof and Structure–The appearance of these types of repairs (and/or capital expenses) may be the result of deficiencies caused by a tenant prior to vacat- ing. Alternatively, in following years, look for these as build-out costs to sub- divide and/ or relet the premises.
Administrative Costs– Some of these closures may result in liens, nes and other fees being incurred by the land- lord on behalf of the tenant that vacated.
Leasing Expenses– to get vacant space back on the market; costs could include marketing materials and leasing/listing materials.
Management Fees–In the event you are required to pay a management fee, un- derstand how the fee is calculated and determine if a vacancy/closure should result in a lower fee for the year and/or on a go-forward basis.